Fed Reviews Two Programs As Markets Look More Stable

By

Jon Hilsenrath

Updated Aug. 6, 2009 11:59 p.m. ET

Federal Reserve officials could move in the coming weeks to extend the life of a program aimed at reviving consumer and business lending markets.

The program -- called the Term Asset-Backed-Securities Loan Facility, or TALF -- will be one of several issues on the table at the Fed's next policy meeting Aug. 11 and 12, when Fed governors meet with presidents of the Fed's 12 regional banks to set a path for interest rates.

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They also will consider whether to extend a program due to expire in September to purchase $300 billion worth of long- and medium-term U.S. Treasury securities. Officials could decide at the meeting to let that program run its course and stop buying Treasury bonds, though the issue isn't settled.

The central bank has shifted into a less aggressive stance in the past few months as the economy and financial markets have shown signs of healing. After pushing short-term interest rates to near zero, flooding financial markets with cash and aggressively launching new programs, the central bank is now allowing some programs to wind down naturally and weighing which others to keep going.

Fed Chairman Ben Bernanke and other Fed officials have sought to assure investors in recent weeks that the central bank will be able to pull back its support for the economy in time to avoid inflation. But with the economy still fragile and unemployment high, they look unlikely to raise interest rates any time soon.

"It is premature to talk about when we are going to exit from this period of unusual accommodation," William Dudley, president of the Federal Reserve Bank of New York, said in a speech last week.

The decision about the Treasury bond purchase program is the most pressing on the agenda. As of Wednesday, the Fed had purchased $237 billion worth of Treasurys, putting it on pace to complete its purchases by mid- to late-September.

Officials aren't convinced it was highly effective at bringing down long-term interest rates. Moreover, they worry about the costs of continuing the program. Investors might worry that more bond purchases will cause inflation by making it easier for the government to run big budget deficits or make it tough to raise interest rates later.

"They've given no indication that they're likely to extend the program," said
Michael Pond,
a bond strategist at Barclays Capital.

Even after all of the Fed's efforts to revive the economy, it still isn't clear it has done enough to promote a strong recovery. Economic forecasts call for the unemployment rate to linger above 8% through 2011.

Extending the TALF program could be one way to do that. When the TALF program was launched in March, officials said it could extend loans of as much as $1 trillion to investors, part of an effort to revive credit markets. So far, it has only reached $30 billion.

TALF is a lifeline to the asset-backed securities market, in which consumer loans, commercial-real-estate loans and other debt are bundled into securities and sold to investors. The government provides low-cost loans with downside protection to investors who in turn use the cash to buy these securities.

Though it is small, officials believe the program has helped improve credit markets. They could decide to extend the program into 2010, beyond its current December expiration. Yields on asset-backed securities have come down substantially since the program was launched.

"We will be reviewing those programs and others to assess whether or not they're needed beyond [2009]," Mr. Bernanke said last month.

A decision about TALF will be made by the Federal Reserve Board, consisting of its five Washington-based governors, and not the broader Federal Open Market Committee, which includes regional Fed presidents. Still, the issue will be discussed with the FOMC when it formally meets next week.

Consumers and commercial real estate are two of the big question marks hanging over the economy. Consumer confidence has sagged anew since May amid rising unemployment, and commercial real estate is suffering from a financing crunch because the market for commercial-mortgage-backed securities has dried up.

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